Evaluating Theories of Income Dynamics: A Probabilistic Approach
Klaus Neusser () and
Diskussionsschriften from Universitaet Bern, Departement Volkswirtschaft
The paper proposes an approach to evaluate hypotheses about transition dynamics when only the distributions at two points in time are observed. Using principles of statistical mechanics, we show how to adjust in the "most probable" way a hypothesis such that it becomes compatible with the observed distributions. This adjustment procedure also allows to test hypotheses in a statistical sense. The test is based on the relative entropy and is equivalent to a likelihood ratio test. We apply our approach to compare the dynamics of the income distribution between men and women in the U.S. using PSID data.
Keywords: income dynamics; large deviation; relative entropy; misspecification (search for similar items in EconPapers)
JEL-codes: C50 C52 D31 (search for similar items in EconPapers)
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Working Paper: Evaluating Theories of the Income Dynamics: A Probabilistic Approach (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:ube:dpvwib:dp9905
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